When a business sells its goodwill, it must record the transaction to accurately reflect the sale in its financial statements. Goodwill represents the intangible value of a business, such as its brand, reputation, and customer relationships. Here’s how you can record the journal entry for the sale of business goodwill:
Sale of Goodwill
Let's assume the business sold its goodwill for ₹500,000. The entries would involve debiting cash or bank for the amount received and crediting the goodwill account for the book value of the goodwill sold. If there is a gain or loss on the sale, it will also be recorded.
Example Scenario
- Book value of goodwill: ₹300,000
- Sale price of goodwill: ₹500,000
- Gain on sale: ₹200,000 (since ₹500,000 - ₹300,000 = ₹200,000)
Journal Entry for the Sale of Goodwill:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Cash/Bank A/c | 500,000 | |
| To Goodwill A/c | 300,000 | ||
| To Gain on Sale of Goodwill A/c | 200,000 | ||
| (Being sale of goodwill recorded) | |||
Notes:
- Cash/Bank A/c: This account is debited for the amount of cash received from the sale.
- Goodwill A/c: This account is credited to remove the book value of the goodwill sold from the books.
- Gain on Sale of Goodwill A/c: This account is credited to record the profit made on the sale of the goodwill. If there was a loss, this account would be a debit entry instead.
Example Scenario with a Loss
If the sale price was less than the book value, say the goodwill was sold for ₹250,000 instead:
Example Scenario
- Book value of goodwill: ₹300,000
- Sale price of goodwill: ₹250,000
- Loss on sale: ₹50,000 (since ₹300,000 - ₹250,000 = ₹50,000)
Journal Entry for the Sale of Goodwill with a Loss:
| Date | Particulars | Debit (₹) | Credit (₹) |
|---|---|---|---|
| 2024-06-30 | Cash/Bank A/c | 250,000 | |
| Loss on Sale of Goodwill A/c | 50,000 | ||
| To Goodwill A/c | 300,000 | ||
| (Being sale of goodwill recorded with a loss) | |||
Notes:
- Loss on Sale of Goodwill A/c: This account is debited to record the loss incurred on the sale of the goodwill.
These entries ensure that the sale of goodwill is accurately reflected in the company’s financial statements, showing the correct financial impact of the transaction.
